Trading the Cap-and-Trade Bill

While much of Wall Street frets the potential losses caused by any of President Obama’s initiatives, Cramer instead tries to find stocks that will work if number 44 gets his way.

Cramer On BEZ

A closer look at Baldor Electric, with Mad Money host Jim Cramer.

When the $787 billion stimulus was working its way through Congress, the Mad Money host recommended infrastructure plays like Caterpillar . Now that health-care reform is on the agenda, he’s endorsing MedcoHealth Solutions , Quest Diagnostics and Gilead Sciences . And with cap-and-trade soon likely to pass in the Senate, he’s got another name worth consideration: Baldor Electric .

Remember, Obama’s cap-and-trade plan is an attempt to curb carbon emissions and fight global warming. The bill as it stands now, recently approved by Congress, calls for a 17% reduction in emissions between 2005 and 2020. The new law also will require that utilities generate 20% of their electricity from renewable sources (think wind, solar, etc.) and energy-efficient technologies by 2020. And there are demands for energy-saving standards for buildings, appliances and industries. While the Senate may adjust these numbers, a government mandate to fight climate change is all but inevitable – and that’s where Baldor comes in.

The company makes efficient high-end motors that cut down on energy consumption and emissions, and Cramer said they could replace their less environmentally friendly predecessors. A new law that requires more high-efficiency motors, effective in December 2010, will provide a bump in business as well. Baldor said that 75% of its motors should see increased sales. Sales are already outpacing the competition: The company’s flagship Super-E motor was up 22% last quarter, compared to 7% for all motor sales.

The downside in this company is the most recent guidance. Management said it expects a 20% to 25% revenue decline for the second quarter, which is down from the 15% to 20% drop it had originally forecast. The silver lining is Baldor’s increased order rates over the past two months. So while Cramer doesn’t like declining earnings, the bad news is already baked into the stock and the potential for a turn makes it more attractive.

It’s important to point out, though, that Baldor is a play on climate-change legislation. So if it weren’t for this bill, Cramer would be less likely to recommend the stock.

The Mad Money host admitted that his previous call on Baldor a year ago didn’t pan out. But he said the circumstances have changed with cap-and-trade now on the table. Should that pass, which looks likely, there’s a good chance of an earnings upside surprise here, especially because Wall Street has such low expectations for the company. In the meantime, a 3.2% dividend yield pays investors to wait.